The Relationship Between Credit Risk Assessment Practice and the Level of Non­ Performing Loans of Kenyan Banks

Abstract

Somebody once said; 'Man's three greatest inventions have been Fire, the Wheel and Credit' perhaps; modem living standards would not have been possible without 'time to pay'. The word 'credit' comes from the Latin credere, meaning 'trust'. When a seller transfers his wealth to a buyer who has agreed to pay later, there is a clear implication of trust that payment will be made at an agreed date, (BU11,1997). Allowing credit should not be an accident; it should be a well-managed process. Credit risk assessment can in simpler terms be the search of this trust. The lack of trust is the genesis of risk assessment, which is the pursuit of this study.

This study aimed at finding out how banks assess credit risk in Kenya including the available and practicable credit assessment methods, and whether a relationship exists between credit risk assessment practice and the level of non-performing loans.

Primary data was collected by use of a questionnaire, while secondary data was collected from the banks annual reports. Data was analysed using tables and interpretations adduced thereto to find out credit risk-assessment practices and the level of non­

performing loans.

The study found out that, bank.s in Kenya use both qualitative and quantitative methods in assessing credit risk, all banks interviewed have credit manuals, 75% of the banks have

credit committees and-that 75% of the banks have reckless lending. Banks that use quantitative methods tend to have low levels of non-performing loans, that is less than 10% as measured by the asset quality ratio. 25.50% of the banks that use both qualitative and quantitative methods have a low level of non-performing loans of less than 10%, while 20.45 of those that~.use qualitative methods. only have level of non-performing loans of less than 10%. Banks relying on qualitative methods only tend to have the highest level of non-performing loans.